finance

You are an inventor with a great business idea but no money. You have approached a venture capitalist (VC), asking for a $40 million investment in your company. You explain that you expect the initial $40 million investment to earn a 50% annual rate of return forever. You plan to reinvest all of the project's earnings in Years 1 and 2, and you expect that these additional investments will also earn a 50% annual rate of return forever. After Year 2, you plan to invest no more in the company, except to maintain assets, so your company's annual earnings should remain constant forever from Year 3 onward.

a) If the VC agrees to give you the $40 million in exchange for a 40% ownership share in the company, what is the company's "after-the-money" valuation?

b) b) If the appropriate discount rate for your business is 20%, what is the VC's NPV from this investment?

c) c) If the capital market were perfectly efficient, what ownership share in the company should the VC have received in exchange for the $40 million investment? Why might it be necessary for you to strike a less advantageous bargain (for you) with the VC than this?